Q3 2019 Earnings Call
Good day and welcome to the aircrafts.
2019 financial results call.
This conference is being recorded transcript will be available following the call on the Companys website.
At this time I would like to turn the conference over to Joseph.
<unk> relations. Please go ahead Sir.
Thank you operator, Hello, everyone welcome to our third quarter, Tony 19 Conference call.
With me today is our Chief Executive Officer, Ingots, Kelly, our Chief Financial Officer, Pete you.
Before we begin todays call I would like to remind you that some statements made during this conference call, which are not historical facts, maybe forward looking statements.
Forward looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.
A couple undertakes no obligation not always buy to publicly update or revise any forward looking statements to reflect future events information or circumstances that arise after this call.
Further information concerning issues that could materially affect performance can be found an air Cubs earnings release dated November 2019.
Copy of our earnings release conference call presentation are available on our website at <unk> Dot com.
This call. It was open to the public on this being webcast simultaneously or their cup dot com and will be archived replay.
Shortly run through earnings presentation will allow time at the end for acuity as a reminder, I would ask that I'm limit themselves to one question on one follow up.
Well not turn the call over to in discovery.
Sure Joe Good morning, everyone.
Thank you for joining us for third quarter earnings call I'm pleased to report another quarter of strong earnings during the third quarter Aercap generated $2.01 earnings per share and net income of $270 million.
It is of course, the platform America and its people that underpins our success.
During the quarter Thier Cup team executed 108 aircraft transactions made up of 72 lease agreements 16 aircraft purchases and 20 aircraft sales. Furthermore, 23 of these transactions where for wide body aircraft.
On the purchase decide we took delivery of 93 20 deals for 77 dash nine to E Twod and an Athree hundred 5900.
These aircraft remains the most in demand variance of their type.
Which helps us to play some further and further out into the future.
The key to Aercaps purchasing and portfolio strategy is to buy aircraft, our customers want no whatever Boeing and Airbus want to sell.
With regard to the Max we did not take any deliveries in Q3, well we continued to work with the Civil Aviation Authority is to ensure the Max is safe returned to service.
Well, we continued to assume that they will obtain regulatory approval in the fourth quarter. This year ultimately, though you see a and other regulatory authorities will determine the timing and we may see variations by jurisdiction.
As a reminder, we've taken delivery of only five Max aircraft today, and we do not expect to receive any for the remainder of this year.
On the sell side, we continue to be active sellers of midlife an older assets.
During the quarter, we sold 19 owned aircraft at an average age 14 years.
And achieved a gain on sale up 8% however, much more importantly, what this gain equates to.
As a premium of almost 30% to the book equity associated with these aircraft.
And this is approximately the premium to book equity that Eric has been earning on aircraft sales for the last 13 years.
These sales have resulted in a further reduction in the average age of our portfolio to 6.2 years from 6.6, a year ago under average remaining lease term is now seven and a half years up from 7.1 12 months ago.
Next Monday I will go into much more detail at our capital markets day on why we believe Aercaps portfolio strategy over the course Apollo 13 years has consistently created the best fleet in the industry and today is no exception.
On demand the utilization rate in the quarter for air cap was 99.8% as demand for our fleet remains high.
I ask that data shows that or pks grew 4.5% through the first nine months of this year after September 30.
While these levels are lower than prior years. We believe this growth rate has been impacted by supply side issues.
During the summer.
This is a flights were cancelled due to both the Max grounding and importantly, Athree 20 neo delays.
In summary, this was another strong quarter for air cap with EPS up 12% year on year.
Our consistent growth in earnings and book value per share is the result of our people processes procedures and a relentless focus on execution.
With that I'll hand, it over to piece before we had the QNX.
Thanks, Scott Good morning, everyone aircraft produced at very strong performance in third quarter, we had earnings per share or $2 in one son and net income $270 million.
Upgraded to Triple B slot play S&P in October and placed on positive outlook by Moody's in August . So we continue to have a positive ratings trajectory.
For utilization rate was very high as Chris mentioned, 99.8% for the third quarter and we completed 108 aircraft transactions in the quarter.
Good purchases of 16 Newtek aircraft during the quarter and sales of 19 of our older and mid life aircraft.
Our average lease assets increased by $2.4 billion year over year.
And our average main lease terms now seven and a half years, one of the longest of any major less or.
Our book value per share increased by 13% over the past year to $69 in 24 cents as of September Thirtyth.
Weve continue with our share repurchase program in the third quarter, we bought 2 million shares for $104 million. So far this year, we bought 9.1 million shares for a total of $438 million.
So altogether, it's a very strong quarter that reflects our consistent operating performance.
There are kept platform and our disciplined approach to managing or assets and allocating our capital.
We're also announcing today, a new 200 million dollar share repurchase program that will run through March of next year.
Turning to slide five or if he has increased by 12% year over year to to a one for the third quarter.
This increase was driven by higher lease rents, resulting from higher average assets in 2019 compared to 20 team as well as to a higher gain on sale of aircraft during the quarter.
On slide six or total revenues for the quarter were $1.194 billion, an increase from $1.167 billion last year, primarily driven by the increase in our average these assets are.
Our basic lease rents increased to $1.067 billion for the third quarter.
Maintenance revenues at $73 million were lower in 2019 due to lower maintenance revenue recognized as a result of lease terminations.
Gains on sale were higher based on the higher volume on the composition of aircraft sales in the quarter.
Other income was flat year over year.
On slide seven or net interest margin was $758 million for the third quarter. The increase over last year was due to growth in our basic lease rents driven by higher average these assets.
Average cost of debt for the third quarter was 3.9% before debt issuance costs and fees of around 30 basis points, including those costs and fees. It was 4.2% for the third quarter with this fight increased from 2018, driven primarily by the roll off at fair value of debt related to purchase accounting.
Our net spread was 8% for the third quarter and our net spread that's depreciation was 3.5% up from 3.3% lost here.
That's spread less depreciation was higher than normal in third quarter, because we had lower maintenance rights amortization expense this quarter than we would normally see.
The average age of our fleet decreased from 6.6 years to 6.2 years over the past year. We achieved this through a combination of purchases of Newtek aircraft and sales of older current technology aircraft. The average age of our new Tech aircraft, which represent 55% of our fleet today is 2.2 years, while the average age of our.
Current taxi that's around 11.1 years.
So effectively in the third quarter between 19, we generate higher returns on a better position portfolio. The lower average age a higher proportion of newtek assets and a longer average remaining lease term.
Turning to slide eight our net gain on sales was 40 and a half million dollars from third quarter. We sold 19 of our owned aircraft, including 14 narrow bodies and five watt a wide bodies with average age of 14 years for a total of $561 million.
And as just mentioned our gain on sales margin was around 8% the quarter.
Turning to aircraft purchases in the third quarter, we took delivery of 16, new aircraft for Capex of around $1.3 billion.
On the next slide <unk> expenses were on $65 million for the third quarter about the same as last year. This includes all stock compensation expense and is around 5.4% of revenues, which shows the efficiency of our platform.
For maintenance rights expense was $14 million the quarter down from 34 million. In 2018. This was primarily driven by the lower maintenance rights asset balance as that asset continues to roll off and it's also impacted by the level of maintenance activity.
Our other leasing expenses were $30 million for the quarter decreased from $51 million last year and this was due to lower expenses related lease terminations compared to the prior year period.
The asset impairments in third quarter related primarily to lease terminations were largely offset by maintenance revenue recognized upon termination.
On slide 10, we continue to maintain a very strong liquidity position as of September Thirtyth, we had available liquidity of $9.1 billion, which includes our cash evolve or <unk> or other undrawn facilities and our contracted sales.
In October we amended and extended our main revolving credit facility. We kept the size of the facility at $4 billion extend the maturity until 2024.
Total cash sources of $12.2 billion are twice, our cash needs over the next 12 months, which amounts to excess cash coverage of just over $6 billion and we'll talk more about our approach to liquidity on Monday.
Finally for shareholders' equity at the end of September was $9.175 billion and our book value per share was 60 924 compared to 60 120 for the September that's a 13% increase over the past 12 months through our operating performance and capital allocation strategy. We can continue to generate strong growth in books.
Oh, you per share year after year.
So in summary, we had another very strong quarter or if you asked was up 12% or utilization rate was high or fleet continues to grow with the addition of Newtek aircraft were placed for out into the future and we continue to sell used aircraft at attractive prices. We ended the quarter with a strong level of liquidity and through our op.
Great performance and capital allocation strategy, we continue to generate strong double digit growth in book value.
And we've continued to maintain or positive rigs trajectory, but the upgrade from S&P in October and the positive outlook for Moody's in August and without now we'll turn it over for Tonight.
Thank you, Sir ladies and gentlemen, if you would like to ask a question at this time. Please signaled by pressing star one on your telephone keypad.
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Signal to reach our equipment.
Once again, please press star one at this time to ask a question.
Pause for just a brief moment to everyone an opportunity to signal for questions.
Well no take our first question over the phone from Moshe Orenbuch <unk> from Credit Suisse. Please go ahead. Your line is open.
Great. Thanks, I guess first from a from a high level perspective, I mean, given that you've seen a some increase in industry M&A I was one of your competitors being acquired a relatively recently any thoughts about.
Whether that presents opportunities and some in some respects a four aercaps in that in the coming months.
[noise] well Moshe I think it demonstrates once again, the big discrepancy between where aircraft trades and what we would call the private market I you not in the public equity markets right, where I was very very small minority of aircraft leasing occurs I see ourselves.
And air lease now being the only to Mr Company.
But in the private Marcus where there is huge.
Capital in this industry and tremendous.
Interest in the business.
What we have seen is that for the course of the last five years Air cap has pretty much sold two and a half times the entire size of Aircastle and we've done it at a premium to book of one 130%.
And.
Because we're selling airplanes at an 8% gross margin. This business is never three to one that's how you get your 30% premium is what we have been consistently selling our assets out in the secondary markets and of course, then where appropriate and applicable we've been using those proceeds to buy up our own shares at about.
84, 85%, so so long as the arbitrage continues to exist we will exploit.
Right, you've actually done a really really strong job with respect to that I said My second question, just a little more little more basic I mean your spread less depreciation was was strong could you talk a little bit I mean, because now you're getting probably closer to where the you know that sleep getting younger has less of an impact on the yield.
Maybe the run off of some of the debt costs in the lower interest rate environment can talk about that so.
Sustainability, if that 3.5% as we go forward.
Yeah, well Moshe so we do expect to sustain that that's a above 3%, but I think I'll cover that on Monday, and the capital markets day, when we have more time to go through all the dynamics there.
Okay. Thank you Peter.
Ladies and gentlemen, if you do find your question has been answered you mean yourself into Q by pressing star too.
Well no take our next question from Jamie Baker from JP Morgan. Please go ahead. Your line is open.
Morning.
On behalf of Jamie Baker.
Just a quick one from me with a growing focus on E.S.G. You can you just touched on what kind of discussions you, maybe having a customer's out to leave it there concerns and how this may impact here at long term strategy going forward.
Sorry, I couldn't quite sure. The question would you mind repeating it.
[noise], Yeah, just a with a growing focused on he is cheap can you just touched on what kind of discussions that you couldn't be having with customers to alleviate these concerns.
How this could potentially impact your long term strategy going forward.
Sure.
Well.
[noise] purely on the environmental side, we've done a tremendous amount to reduce the carbon footprint and fuel burn of our fleet. We have spent more money than anyone in the world on acquiring new technology assets, we spent $23 billion in the last five years buying.
The most advanced fuel fuel efficient airplanes that are in the markets.
So we continue to have those discussions about customers. So we're doing as much as we can however, it has to be set of course, when youre an airline margins our thin, it's a large scale business with relatively thin margins.
And why many of our customers are doing all they can.
To reduced the fuel burn that they have by the same token. They also have an obligation to their shareholders as well.
So there is still strong demand for current technology assets. Good variance of current technology assets, which would be the 320, the 737 add to triple seven and the Athree territory.
Got it thank you.
Okay.
We'll now take our next question from Helen Becker from Cowen. Please go ahead. Your line is open.
Hello.
Hello Hello.
Yeah, we can hear you Oh, yes, okay, sorry about that.
So here's my question I have actually two questions. My first question is and I don't mean to be stupid and I apologize, but when you talk about the gains.
That you report.
And the fact that you had an 8% gain on the sold aircraft. It is static gain after <unk> is that instead of pure gain on your your cost or is that a gain after writing assets down how I don't understand how to think about that.
Like the difference between the two Jeanette I mean.
Okay.
Helane dark gain is simply the carrying value of our assets before any charges write downs or anything like that and what we're selling at a premium. So we so we've been asked it on our books for $100. Unlike other leasing companies have taken large impairments because they bought the wrong assets aircraft never house.
So you know kind of we've ever taken over as Pete just announcements to do with small amounts to do at lease terminations, where you're offsetting maintenance reserves, but the largest kinda impairments that have a car leasing company has never ever happened at air cap and we only report.
On an adjusted GAAP numbers, we don't give you any other metric except money, we actually make and whats available to distribute to shareholders. So when we give you a number if we say we sell an airplane at an 8% margin. It was on the books for 100 million that means we sold at 108 million however, because the equity component.
It's 25 million, where lever three to one so in our hundred 25 as equity.
Well actually selling at a premium to our equity component of over 130%. So over the last 13 14 years Air Cup has consistently sold 800 plus airplanes at a margin of 130% approximately two its book equity.
Okay. That's that's very helpful. Thank you very much I appreciate that.
Then just on my my other question.
Yes, there seems to have been a decline in the number of Chinese leasing companies that we've been seeing [noise].
And.
I'm kind of wondering if you guys are seeing that you know as well or are you seeing.
Fewer competitors when when.
When you're out there you know competing for business.
Are you noticing that.
Helane, it's fair to say.
Scott.
Over the course of the last eight nine years.
There was an influx of.
Startup capital into this sector Mount much of it did come from China.
Not capital is particularly focused on chasing new airplanes, either through the sale leaseback Marcus to buying airplanes off of the less or such as ourselves.
Or in some were in a small minority of cases ordering from Airbus and Boeing now what we have seen and we have observed over the course of the last 12 months.
He is a reduction.
In the appetite.
Particularly Chinese last source have I think that's due to a combination of factors. Many of them are owned by banks, where dollar funding maybe slightly more challenging. Furthermore, some of them well have paid some significant premiums to get their hands on those assets. Those assets are now maturing the leases that they bought them on.
Leases are expiring and are having to place. These airplanes themselves a few of them have a platform capable of leasing aircraft and so I think we have well I know we have seen.
At least a couple of these are less or start to sell all parts of their portfolio. However, there are still some of course that are that are very competitive in the market, but there's certainly a reduction.
Okay. Thank you very much I appreciate that and all I see a Monday.
No problem.
No take our next question from Ross Harvey from Davy. Please go ahead. Your line is open.
Hi, good morning, guys subtler through quarter or what are the more the strategic questions to Monday bought on housekeeping side I'm just wondering for piece what should we think about in terms of baseline maintenance rights amortization expenses.
DNA and coming quarters.
Well Ross I'll cover all that stuff on Monday, as well, but I mean basically you know it's been running at about are they at least 65 million or so as gionee, that's probably could go up slightly from that but it's going to be around that area 60 570 million and then.
On the maintenance rights amortization it was low this quarter a at only 14 million.
Typically that would be more like 2020 5 million or so maybe 30, but probably 25 million as a good number.
Uh huh.
Thanks.
Well no take our next question from catching O'brien from Goldman Sachs. Please go ahead. Your line is open.
20, Ron Thanks for the time.
A bit of a follow up to Moshe and Helanes question earlier, you know you're seeing I guess has been this continuing discussion with the past couple of quarters that new entrants competition has decreased or are those in the market has gotten a little bit more rational perhaps you know how be gone to the point, where do you think there are more attractive opportunities for M&A or are we.
It is buying back your on chairs that sell the most accretive option the girl earnings.
Thanks.
Well well copper as I said look if we're consistently able to set our own airplanes at 130% of bulk and by ourselves back at 85, Vod, that's a fairly big arbitrage. So that's highly attractive.
But throughout the cycle you have to be nimble and recognize opportunity where it comes from we have obviously bought more airplanes than anyone in the world over the last five years, we've paid down more debt than anyone in the world, We've given back more money to our shareholders than anyone in the world.
Over the last 15 years, we've done more M&A than anyone in the world.
So what you need to be is nimble to which alternative creates the best risk rewards for your shareholders over the medium to long term.
If that's M&A well in gold as we've done a lot of us, but if it isn't it isn't you know when you've just got to see what are the opportunities are we will talk a bit more about this on Monday as well, though.
That's great and and then maybe a one of your competitor as noted last night that Boeing is providing financial assistance some of their lessees impacted by the granting the Max in some cases, helping them you know pay their monthly leases I hear lessees also receiving financial assistance and buying thanks.
It varies by customer on the needs of each customer what's happening with Boeing and there's a wide array of discussions going on at the moment and they're very much I would say in the first innings of those discussions there's a fair bit of wood to chop.
Got it. Thank you. This means maybe one quick modeling what if.
Any any update on the 616, a 680 bps.
Outlook for this year its gains.
No well the I'll be providing a new update for this year and for next year on Monday.
Okay, great looking forward to thank you.
Thanks.
Well no take our next question Scott Valent in from Compass point. Please go ahead. Your line is open.
Thanks, taking my question just Gus you mentioned the seventh we set a max the timing the returns up to the regulators, but when it does come back you expect there to be a glut of aircraft do you think that might depress given increasing supply of aircraft in our bodies, particularly might depress gain on sale margins for a little bit until until the market clears.
I don't I think everybody knows this airplane will come back.
Signed into the schedules for some point in the new year I'm, certainly there will be differences by jurisdiction, but ultimately the airlines are expecting the airplanes. They have to get back in the air and for deliveries to resume the pace at which they resume remains to be seen will bowling be able to deliver at the right they've been.
Indicated, perhaps perhaps not but I do think fast feet, the and the process will stretch out over time and das add the customers.
Our are assuming these airplanes are coming so I don't see these aircraft leading to a constant supply in the market.
Yeah. Thanks, a follow up also.
Having their own issues.
At the Hamburg Humbert plant I'm, just wondering how you think about Capex and.
If there is delays do you step in the secondary market, maybe do sale leaseback transactions or do you just let it work through the system and you know you said you could buy back stock and do other things with with the capital.
We would never ever.
Go out and by airplane for the sake of growth ever.
Only ever spend our shareholders' money.
If it makes a sensible long term return for our shareholders.
If we do not receive airplanes from Boeing and Airbus a schedule. It would be an act of gross Jupiter C to go into the markets to buy overpriced sale lease backs in order to satisfy our quarterly growth targets. At this company will never do that and what we will do as look at what are the.
<unk> best possible alternatives available for us.
With the capital letters that that is not being used that could be buybacks. It could be just waiting for the airplanes to come but never under any circumstances will be go into the market to buy sub optimal or overpriced assets on the spur the moment, because you're not getting deliveries from Boeing and Airbus.
Okay. Thanks I appreciate the response.
Okay.
[noise].
Our next question comes from Coos Patel from Deutsche Bank. Please go ahead. Your line is open.
Hey, guys I just had one aircraft types. The HM Airbus 80, 20 has continued to gain some traction with airlines. How do you guys think about how that asset might fit into the air kept portfolio and maybe more broadly speaking is that the REIT asset for a public less or portfolio.
No I think the.
Now that the eight to 20 has been.
It was obviously you end up on Bharti aid to be concerned everybody had was.
While it's been Bharti, a viable entity stand at all and that was highly questionable the thier at a manufacturer would survive. So everyone was extremely reluctant at departures that airplane because at the OEM failed and then the value of the asset what tank.
And now that Airbus harvests, and certainly that issue as long gone and it has the Airbus am muscle behind US I think the long term success of the airplane will probably be the next to variant and if there is a new family of Airbus airplanes or if this airplane as modified to have more commonality with.
320 family itself.
Great. Thanks, a lot guys.
Right.
Ladies and gentlemen, just concludes todays question and answer session. Mr. Kenny I would like to turn the conference back to your so for any additional for closing remarks.
Thank you very much.
Look in closing we produced another very strong quarter of earnings and profits. This was achieved through a very proactive risk management policy and a disciplined approach to portfolio management, but above all a relentless focus on execution in all parts of the business.
As you all know we'll be hosting the 2019 capital markets Day next Monday in New York at the same Regis Hotel and we hope you'll see as many of you as possible there on Monday. Thank you very much everyone.
Ladies and gentlemen, this concludes todays call. Thank you for your participation you may now disconnect.